BILL NUMBER: SB 705	CHAPTERED  07/07/99

	CHAPTER   77
	FILED WITH SECRETARY OF STATE   JULY 7, 1999
	APPROVED BY GOVERNOR   JULY 7, 1999
	PASSED THE SENATE   JULY 1, 1999
	PASSED THE ASSEMBLY   JUNE 16, 1999
	AMENDED IN ASSEMBLY   JUNE 16, 1999

INTRODUCED BY   Senator Sher and Assembly Members Cunneen, Nakano,
and Alquist
   (Coauthors:  Senators Vasconcellos and Figueroa)
   (Coauthors:  Assembly Members Wayne, Jackson, Honda, Lempert,
Davis, Correa, Havice, Lowenthal, Maldonado, Strickland, Maddox,
Robert Pacheco, and Pescetti)

                        FEBRUARY 24, 1999

   An act to amend Sections 17052.12 and 23609 of the Revenue and
Taxation Code, relating to taxation, to take effect immediately, tax
levy.



	LEGISLATIVE COUNSEL'S DIGEST


   SB 705, as amended, Sher.   Personal income taxes:  bank and
corporation taxes:  research and development.
   The Personal Income Tax Law and the Bank and Corporation Tax Law,
by reference to a specified federal statute, allow a credit against
taxes imposed by those laws for increasing research expenses, as
defined.  In general, the amount of the credit under both laws is
equal to 11% of the excess of the qualified research expenses, as
defined, for the taxable or income year over the base amount and, in
addition, for purposes of the Bank and Corporation Tax Law, 24% of
the basic research payments, as defined.  The term "base amount"
means the product of the average annual gross receipts of the
taxpayer for each of the specified years preceding the taxable or
income year and the fixed-base percentage, as defined, but in no
event less than 50% of the qualified research expenses for the
taxable or income year.
   This bill would, under both laws, for each taxable or income year
beginning on or after January 1, 1999, provide that the credit for
increasing research expenses shall be equal to 12% of the qualified
research expenses.
   This bill would take effect immediately as a tax levy.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Section 17052.12 of the Revenue and Taxation Code is
amended to read:
   17052.12.  For each taxable year beginning on or after January 1,
1987, there shall be allowed as a credit against the "net tax" (as
defined by Section 17039) for the taxable year an amount determined
in accordance with Section 41 of the Internal Revenue Code, except as
follows:
   (a) For each taxable year beginning before January 1, 1997, the
reference to "20 percent" in Section 41(a)(1) of the Internal Revenue
Code is modified to read "8 percent."
   (b) (1) For each taxable year beginning on or after January 1,
1997, and before January 1, 1999, the reference to "20 percent" in
Section 41(a)(1) of the Internal Revenue Code is modified to read "11
percent."
   (2) For each taxable year beginning on or after January 1, 1999,
the reference to "20 percent" in Section 41(a)(1) of the Internal
Revenue Code is modified to read "12 percent."
   (c) Section 41(a)(2) of the Internal Revenue Code, relating to
basic research payments, shall not apply.
   (d) "Qualified research" shall include only research conducted in
California.
   (e) In the case where the credit allowed under this section
exceeds the "net tax," the excess may be carried over to reduce the
"net tax" in the following year, and succeeding years if necessary,
until the credit has been exhausted.
   (f) (1) With respect to any expense paid or incurred after the
operative date of Section 6378, Section 41(b)(1) of the Internal
Revenue Code is modified to exclude from the definition of "qualified
research expense" any amount paid or incurred for tangible personal
property that is eligible for the exemption from sales or use tax
provided by Section 6378.
   (2) For each taxable year beginning on or after January 1, 1998,
the reference to "Section 501(a)" in Section 41(b)(3)(C) of the
Internal Revenue Code, relating to contract research expenses, is
modified to read "this part or Part 11 (commencing with Section
23001)."
   (g) (1) For each taxable year beginning on or after January 1,
1998:
   (A) The reference to "1.65 percent" in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read "one and thirty-two
hundredths of one percent."
   (B) The reference to "2.2 percent" in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read "one and seventy-six
hundredths of one percent."
   (C) The reference to "2.75 percent" in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read "two and two-tenths of
one percent."
   (2) Section 41(c)(4)(B) shall not apply and in lieu thereof an
election under Section 41(c)(4)(A) of the Internal Revenue Code may
be made for any taxable year of the taxpayer beginning on or after
January 1, 1998.  That election shall apply to the taxable year for
which made and all succeeding taxable years unless revoked with the
consent of the Franchise Tax Board.
   (3) Section 41(c)(6) of the Internal Revenue Code, relating to
gross receipts, is modified to take into account only those gross
receipts from the sale of property held primarily for sale to
customers in the ordinary course of the taxpayer's trade or business
that is delivered or shipped to a purchaser within this state,
regardless of f.o.b. point or any other condition of the sale.
   (h) Section 41(h) of the Internal Revenue Code, relating to
termination, shall not apply.
   (i) Section 41(g) of the Internal Revenue Code, relating to
special rule for passthrough of credit, is modified by each of the
following:
   (1) The last sentence shall not apply.
   (2) If the amount determined under Section 41(a) of the Internal
Revenue Code for any taxable year exceeds the limitation of Section
41(g) of the Internal Revenue Code, that amount may be carried over
to other taxable years under the rules of subdivision (e); except
that the limitation of Section 41(g) of the Internal Revenue Code
shall be taken into account in each subsequent taxable year.
  SEC. 2.  Section 23609 of the Revenue and Taxation Code is amended
to read:
   23609.  For each income year beginning on or after January 1,
1987, there shall be allowed as a credit against the "tax" (as
defined by Section 23036) an amount determined in accordance with
Section 41 of the Internal Revenue Code, except as follows:
   (a) For each income year beginning before January 1, 1997, both of
the following modifications shall apply:
   (1) The reference to "20 percent" in Section 41(a)(1) of the
Internal Revenue Code is modified to read "8 percent."
   (2) The reference to "20 percent" in Section 41(a)(2) of the
Internal Revenue Code is modified to read "12 percent."
   (b) (1) For each income year beginning on or after January 1,
1997, and before January 1, 1999, both of the following modifications
shall apply:
   (A) The reference to "20 percent" in Section 41(a)(1) of the
Internal Revenue Code is modified to read "11 percent."
   (B) The reference to "20 percent" in Section 41(a)(2) of the
Internal Revenue Code is modified to read "24 percent."
   (2) For each income year beginning on or after January 1, 1999,
both of the following shall apply:
   (A) The reference to "20 percent" in Section 41(a)(1) of the
Internal Revenue Code is modified to read "12 percent."
   (B) The reference to "20 percent" in Section 41(a)(2) of the
Internal Revenue Code is modified to read "24 percent."
   (c) (1) With respect to any expense paid or incurred after the
operative date of Section 6378, Section 41(b)(1) of the Internal
Revenue Code is modified to exclude from the definition of "qualified
research expense" any amount paid or incurred for tangible personal
property that is eligible for the exemption from sales or use tax
provided by Section 6378.
   (2) "Qualified research" and "basic research" shall include only
research conducted in California.
   (d) The provisions of Section 41(e)(7)(A) of the Internal Revenue
Code, shall be modified so that "basic research," for purposes of
this section, includes any basic or applied research including
scientific inquiry or original investigation for the advancement of
scientific or engineering knowledge or the improved effectiveness of
commercial products, except that the term does not include any of the
following:
   (1) Basic research conducted outside California.
   (2) Basic research in the social sciences, arts, or humanities.
   (3) Basic research for the purpose of improving a commercial
product if the improvements relate to style, taste, cosmetic, or
seasonal design factors.
   (4) Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral (including oil and gas).
   (e) (1) In the case of a taxpayer engaged in any biopharmaceutical
research activities that are described in codes 2833 to 2836,
inclusive, or any research activities that are described in codes
3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial
Classification (SIC) Manual published by the United States Office of
Management and Budget, 1987 edition, or any other biotechnology
research and development activities, the provisions of Section 41(e)
(6) of the Internal Revenue Code shall be modified to include both of
the following:
   (A) A qualified organization as described in Section 170(b)(1)(A)
(iii) of the Internal Revenue Code and owned by an institution of
higher education as described in Section 3304(f) of the Internal
Revenue Code.
   (B) A charitable research hospital owned by an organization that
is described in Section 501(c)(3) of the Internal Revenue Code, is
exempt from taxation under Section 501(a) of the Internal Revenue
Code, is not a private foundation, is designated a "specialized
laboratory cancer center," and has received Clinical Cancer Research
Center status from the National Cancer Institute.
   (2) For purposes of this subdivision:
   (A) "Biopharmaceutical research activities" means those activities
that use organisms or materials derived from organisms, and their
cellular, subcellular, or molecular components, in order to provide
pharmaceutical products for human or animal therapeutics and
diagnostics.  Biopharmaceutical activities make use of living
organisms to make commercial products, as opposed to pharmaceutical
activities that make use of chemical compounds to produce commercial
products.
   (B) "Other biotechnology research and development activities"
means research and development activities consisting of the
application of recombinant DNA technology to produce commercial
products, as well as research and development activities regarding
pharmaceutical delivery systems designed to provide a measure of
control over the rate, duration, and site of pharmaceutical delivery.

   (f) In the case where the credit allowed by this section exceeds
the "tax," the excess may be carried over to reduce the "tax" in the
following year, and succeeding years if necessary, until the credit
has been exhausted.
   (g) For each income year beginning on or after January 1, 1998,
the reference to "Section 501(a)" in Section 41(b)(3)(C) of the
Internal Revenue Code, relating to contract research expenses, is
modified to read "this part or Part 10 (commencing with Section
17001)."
   (h) (1) For each income year beginning on or after January 1,
1998:
   (A) The reference to "1.65 percent" in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read "one and thirty-two
hundredths of one percent."
   (B) The reference to "2.2 percent" in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read "one and seventy-six
hundredths of one percent."
   (C) The reference to "2.75 percent" in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read "two and two-tenths of
one percent."
   (2) Section 41(c)(4)(B) shall not apply and in lieu thereof an
election under Section 41(c)(4)(A) of the Internal Revenue Code may
be made for any income year of the taxpayer beginning on or after
January 1, 1998.  That election shall apply to the income year for
which made and all succeeding income years unless revoked with the
consent of the Franchise Tax Board.
   (3) Section 41(c)(6) of the Internal Revenue Code, relating to
gross receipts, is modified to take into account only those gross
receipts from the sale of property held primarily for sale to
customers in the ordinary course of the taxpayer's trade or business
that is delivered or shipped to a purchaser within this state,
regardless of f.o.b. point or any other condition of the sale.
   (i) Section 41(h) of the Internal Revenue Code, relating to
termination, shall not apply.
   (j) Section 41(g) of the Internal Revenue Code, relating to
special rule for passthrough of credit, is modified by each of the
following:
   (1) The last sentence shall not apply.
   (2) If the amount determined under Section 41(a) of the Internal
Revenue Code for any income year exceeds the limitation of Section 41
(g) of the Internal Revenue Code, that amount may be carried over to
other income years under the rules of subdivision (f), except that
the limitation of Section 41(g) of the Internal Revenue Code shall be
taken into account in each subsequent income year.
  SEC. 3.  This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.
